Chorus says annual earnings could fall up to $160M

Monday 3rd December 2012

Chorus' annual earnings would be slashed by as much as 40 percent if the competition regulator goes ahead with draft plans to steeply cut what the telecommunications network operator can charge for access to electronic switchgear on its ageing copper lines.

The telecommunications network operator has slammed the Commerce Commission's draft regime on pricing for unbundled bitstream access (UBA) services, saying it could reduce annual earnings before interest, tax, depreciation and amortisation by $150 million to $160 million from December 2014, based on existing connections. Wellington-based Chorus had $399 million ebitda in 2012.

"Today's decisions are a significant step backward," chief executive Mark Ratcliffe said in a statement. "Shifting the relativity of copper and fibre pricing will discourage that transition."

The commission set the new unbundled copper local loop (UCLL) rates at a geographically averaged price of $23.52 per month per line from Dec. 1, 2014, a 3.9 percent reduction to the prices set in 2007. Urban UCLL prices have been set at $19.08 and rural at $35.20, effective immediately. UBA prices will be provisionally set at $32.45 per month, effective from Dec. 1, 2014, from the existing $44.98.

The regulator's softer regime for pricing the unbundled copper local loop (UCLL) would trim annual ebitda by about $20 million, Chorus said.

Wholesale prices for access to the copper lines were averaged as a result of legislation enabling Telecom to carve out its Chorus unit last year, something that annoyed rival telecommunications companies who said it would lift their costs.

At the time of the enabling legislation, Ministry of Economic Development officials downplayed concerns about the impact on copper-line prices, saying it wasn't "deemed significant" and that any increase in UCLL pricing may "have the positive impact of encouraging more investment and innovation on fibre."

Chorus shares sank 12 percent to $2.98 when they resumed trading after being halted for the announcement.

Among concerns is the potential for much lower copper network pricing to deter investment and uptake of ultra-fast broadband, using the government-subsidised fibre network being laid throughout the country.

Ratcliffe said the company will take the matter up with the government "about the apparent policy disconnect, and Chorus' role in the UFB programme" with a view to at least bringing forward a regulatory review to foster the fibre environment.

Chorus was spun-out from Telecom as a separately-listed company last year to free up the telecommunications company from its regulatory burden and allow the network operator to successfully win a billion dollar subsidy to build a nationwide fibre network and rural broadband system.

Some 80 percent of the network company's revenue is still derived from the ageing copper network, and is subject to the Commerce Commission's pricing review.

At a media briefing in Wellington, Telecommunications Commissioner Stephen Gale today stressed the UBA pricing regime was a draft decision and would go out to industry for consultation with a view to making a final ruling in June.

If telecommunications companies are unhappy with the final benchmark, they can request the regulator use a cost-modelling approach to determine pricing instead, he said.

"This (UBA) price when finally decided in two years may have a significant impact on Chorus' revenue," Gale said.

The UCLL service lets telecommunication companies use the copper network between an exchange and an end-user's premises to offer their own voice and broadband services. UBA gives access to Chorus's electronics, software and transport over the network, meaning telcos don't have to build their own.

BusinessDesk.co.nz

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